Exclusive: India asks state banks to withdraw cash held abroad over Cairn dispute, sources say

By Aftab Ahmed and Nupur Anand

NEW DELHI (Reuters) - India has asked state-run banks to withdraw funds from their foreign currency accounts abroad, two government officials and a banker said, as New Delhi fears Cairn Energy may try to seize the cash after an arbitration ruling in a tax dispute.

Cairn was awarded damages of more than $1.2 billion plus interest and costs in December in a long drawn-out tussle with the Indian government over its retrospective tax claims.

While New Delhi has filed an appeal, the London-listed firm has started identifying Indian assets overseas, including bank accounts, that could be seized in the absence of a settlement, which Cairn says it is still pursuing.

The company has registered its claim against India in courts in the United States, Britain, France, the Netherlands, Singapore and Quebec, moves that could make it easier to seize assets and enforce the arbitration award.

"Earlier this week a guidance was sent to state-run banks to withdraw funds from their nostro accounts," one of the government officials, who asked not to be named, told Reuters, adding that the finance ministry had issued the guidance.

A nostro account refers to an account a bank holds overseas at another bank in the currency of that jurisdiction. Such accounts are used for international trade and to settle other foreign exchange transactions.

The finance ministry did not immediately respond to requests for comment.

A banker from one of India's 12 state banks, who also asked not be identified, confirmed the ministry had sent the guidance and said the government was concerned courts abroad could order funds in their jurisdiction be remitted to Cairn.

"There was an apprehension that some courts may take a drastic measure saying whatever the offshore funds of the government of India, those may be taken over or frozen for the time being," the banker told Reuters. "Our assets are tantamount to assets of the government of India as we are owned by them."

The Indian Banks' Association, an industry body representing lenders, did not immediately reply to a request for comment. At least two state banks also did not respond, while others could not be reached outside of regular office hours.

Cairn said in February it was discussing several proposals with the government to find a solution.

"Cairn continues to have constructive engagement with the government of India," a spokesman for the company said when asked about the case on Thursday.

But the second Indian government official said talks between New Delhi and Cairn were making little progress and said the ministry's request to banks showed the government was worried that the British firm could move quickly to seize assets.

The dispute began after a previous Indian government decided to impose capital gains tax retrospectively on some companies, such as Cairn and telecoms operator Vodafone Plc, which also took its case to arbitration and won.

The cases scared off foreign investors and dealt a blow to the government of Manmohan Singh, who lost power in a 2014 election to Prime Minister Narendra Modi.

Modi's government has said it would not make retrospective tax claims in future but it has defended outstanding cases.

(Reporting by Aftab Ahmed and Nupur Anand; Editing by Aditi Shah and Edmund Blair)